On The Verge Of A Global Food Crisis

A week after the UN's Food and Agricultural Organization (FAO) warned of a possible "food price shock" if prices continued to rise, the USDA downwardly revised its outlook for global harvests of key crops, sending future prices surging and fueling concerns over a repeat of the 2008 food crisis which sparked riots in over 30 countries. With riots already occurring in Algeria and Mozambique, the impending crisis even sparked a reaction by World Bank Chief Robert Zoellick, who sought to calm the already uneasy markets.

The global food situation doesn't look too promising, as floods in Australia and excessively hot weather in Latin America harm harvests, upward pressure is mounting on prices. According to the FAO, a basket tracking the wholesale cost of food commodities such as wheat, corn, rice, vegetable oils, and meats, has already topped 2008's peak values, reaching 214.5 points (compared to 213.5 on June 2008). And, as the USDA cuts its global grain supply outlook, soybean, corn, and wheat prices have spiked, nearing or passing 30-month highs.

The situation prompted a response by Zoellick, who a few months ago rallied the markets with talk of the gold standard. On this occasion, he told the Financial Times that "with food accounting for a large and volatile share of tight family budgets in the poorest countries, rising prices are re-emerging as a threat to global growth and social stability." Zoellick went on to enumerate measures to make markets more efficient, such as establishing small regional humanitarian reserves in disaster-prone, infrastructure-poor areas and improving long-range weather forecasting and monitoring. (See World Bank Chief Riles Up Economists By Talking Gold Standard).

Zoellick's op-ed piece was titled "Free markets can still feed the world," but the problem is that many of these markets are actually not liberated. During the '08 crisis, many producing nations sought to freeze prices and curb exports in order to keep domestic food stocks available, Argentina and Russia were among them.

Some of this could be happening again. As futures for corn, soybeans, and wheat have gained 94%, 51%, and 80% respectively since their June gains, producers in Argentina are still struggling with the same problems as in 2008. On Wednesday, the "Engagement Table," a combination of the four largest groups fusing agricultural producers announced they were boycotting the government by withdrawing from the wheat markets to protest bad policies and tax exports, reports Argentina's Fortuna. By refusing to sell their products, producers are denying the State the possibility of collecting juicy taxes needed to keep their precious fiscal surplus.

Agricultural markets are intervened by the state in Argentina, where exports are limited by taxes while domestic sales must go through the state, which pays meagerly. In 2008, the country was put on a standstill as the ruling party, headed by the late Nestor Kirchner and his wife, President Cristina Kirchner, attempted to hike export taxes on soy beans to about 45%. A three-month standoff, on the verge of erupting into civil violence, ended when vice-president Cobos, a member of opposing party Union Civica Radical, acted as tie-breaker in the Senate, voting against the government's tax hike.

Another problem Zoellick doesn't take into consideration is the falling value of the dollar. Ben Bernanke's quantitative easing, along with loose monetary policy in developed economies, have caused the well-known flood of capital to emerging economies, as investors seek out higher returns. A tanking dollar will lead to greater demand for dollar-denominated commodities, as these appear cheaper due to the forced appreciation of emerging market currencies (the dollar doesn't just go down, as exchange rates are relative or in relation to each other). Those same-dollar denominated prices have been shooting through the roof in response to increased demand, especially from China and India, and an attempt to hedge against inflation. And inflation, in turn, will erode the purchasing power of the world's poor, which, coupled with higher prices, could lead to food riots and social unrest. (See Geithner's Criticism of China, Another Lost Opportunity to Fix Global Imbalances).

The world is treading on dangerous ground. Market forces are in place for another global food crisis, and, as the wheels keep turning, it will become harder for these to be put in reverse.